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Trump Tariffs Threaten to Sideline Global Trade System

Date 01-May-2018
Subject Trump Tariffs Threaten to Sideline Global Trade System

President Trump’s U-turn on steel and aluminum tariffs reversed 65 percent of the steel taxes (tariffs) and 55 percent of the aluminum taxes (tariffs). That reversal has a time limit and the time limit is May 1.

This means that economists will have to turn to the Trump Twitter feed to see if there are policy announcements extending the U-turn or whether U.S. taxes are about to go up again. The Trump Twitter feed has been full of things other than trade policy, so far.

The risk of Trump raising taxes further is that this would trigger a European response.

On Friday, German Chancellor Angela Merkel said “implicitly” during a press conference with President Trump at the White House that no deal had been reached to extend the temporary exemption to U.S. tariffs (taxes) on steel and aluminum on imports from Germany and other EU countries. She said: "The president will decide, that is very clear. We had an exchange of views on the current state of affairs of the negotiations and the respective assessments on where we stand on this and the decision lies with the president."

Germany and members of the EU have been granted a temporary exemption from the 25 percent U.S. tariff on steel imports and the 10 percent tariff on aluminum imports, which took effect March 23. However, those exemptions expire tomorrow, May 1st unless a longer-term deal can be reached.

Top White House economic adviser Larry Kudlow said last Thursday that America's trading partners must make concessions in order to avoid the tariffs.

For financial markets, in case there is no extension that would represent another challenge to the assumptions of free trade, which underpins modern business. One should expect companies to try and find ways around the tax.

Now, investors could do well keeping in mind that foreign steel can still be sold tax-free in the United States. But rather than making cars in the United States with foreign steel, it might make sense to make cars outside the U.S. with foreign steel and then import the cars. The steel gets in, but if it’s part of the car it’s not subject to the 25 percent tax (tariff). This underscores the challenge of taxing by a tariff. Such a policy might have worked in the 19th century but it is not perhaps best suited to the 21st century. 

Putting it another way, the tax revenue from trade taxes will be less than 25 percent at the current value of U.S. steel imports.

In this sense it’s a bit of a shame. The United States could do with some tax revenue given the size of the budget deficit.

Besides that, today in the U.S. we have the release of the personal consumer expenditure deflator, which accompanies personal income and personal spending figures. The PCE deflator is subject to fewer non-market distortions than is consumer price inflation, which is why it’s more influential than consumer price inflation when it comes to Fed policy.

However, the financial markets tend to pay more attention to consumer price inflation.

Of course, the inflation-linked Treasury securities are tight to consumer prices.

In the meantime, over in Europe we’ll get the inflation data for April from Germany and Italy, which is likely to be something of a contrast as the Italian economy does not have the strength of the German economy and as a result, the Italian economy does not have the overall price pressures of the German economy.

German prices pressures have been building, albeit slowly, in recent months.

Finally, in the UK, the Home Secretary Ms. Amber Rudd has resigned from the government. Normally this would get not any attention from the financial markets, but on this occasion however it does potentially disrupt the balance of power in the British government around the long goodbye from the European Union (EU). The Home Secretary was an enthusiastic supporter of the European Union (EU). This resignation comes as the issue of the customs union is being debated within the UK government and financial markets may take it as reducing the chances of a customs union deal being agreed.


Source:-Newsmax.com

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